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The Deleveraging Spiral
Borrow money to buy asset
Asset goes up
Borrow more, buy more
Asset flatlines
Asset goes down
Lender requests money
Sell asset to pay lender
Selling drives asset down
Lender asks for more money
Sell more to pay lender
Asset collapses
Borrow money to buy assetAsset goes upBorrow more, buy moreAsset flatlinesAsset goes downLender requests moneySell asset to pay lenderSelling drives asset downLender asks for more moneySell more to pay lenderAsset collapses
This is the generalized model of every financial downturn since the invention of credit.
If you understand it, the state of markets—stocks, crypto, everything—will make a whole lot more sense.
If you understand it, the state of markets—stocks, crypto, everything—will make a whole lot more sense.
Example 1: Evergrande https://twitter.com/sahilbloom/status/1439920043404546050
Example 2: Archegos https://twitter.com/sahilbloom/status/1381602265736171522
The trigger is always different, but the sequence of events is always eerily similar.
It’s not fun to watch…but it’s certainly nothing new.
I’ll write more about this in the weeks ahead as stories arise. Follow me @SahilBloom to catch some simplified learning in your feed.
It’s not fun to watch…but it’s certainly nothing new.
I’ll write more about this in the weeks ahead as stories arise. Follow me @SahilBloom to catch some simplified learning in your feed.
